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Does Formality Improve Micro-Firm Performance? Quasi-Experimental Evidence from the Brazilian SIMPLES Program

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Author Info

  • Fajnzylber, Pablo

    ()
    (World Bank)

  • Maloney, William F.

    ()
    (World Bank)

  • Montes-Rojas, Gabriel V.

    ()
    (City University London)

Abstract

This paper employs regression discontinuity methods to identify the effect of formality on Brazilian micro-firm performance. The SIMPLES program introduced in November 1996 consolidated multiple taxes and social security contributions into a single payment and reduced taxes for eligible small firms. This provides a quasi-natural experiment that allows us to eliminate many of the endogeneity issues surrounding the impact of formality, measured across several dimensions, on firm performance. We find that SIMPLES had a significant effect on the proportion of firms that have a license to operate, are registered as a legal entity, pay taxes and make social security contributions. Moreover, newly created firms that opt for operating formally achieve higher levels of revenue and profits, employ more workers and are more capital intensive (only for those firms that have employees). The channel through which this occurs is not access to credit or contracts with larger firms. Rather, it appears that the lower cost of contracting labor leads to adopting production techniques that involve greater permanence and a larger paid labor force.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4531.

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Length: 37 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:iza:izadps:dp4531

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Keywords: micro-firms; self-employment; informality;

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References

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  1. Bruhn, Miriam, 2008. "License to sell : the effect of business registration reform on entrepreneurial activity in Mexico," Policy Research Working Paper Series 4538, The World Bank.
  2. Aureo de Paula & Jose A. Scheinkman, 2007. "The Informal Sector," PIER Working Paper Archive 07-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. David Kaplan & Eduardo Piedra & Enrique Seira, 2006. "Are Burdensome Registration Procedures an Important Barrier on Firm Creation? Evidence from Mexico," Discussion Papers 06-013, Stanford Institute for Economic Policy Research.
  4. James J. Heckman & Carmen Pagés, 2004. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Books, National Bureau of Economic Research, Inc, number heck04-1.
  5. Levenson, Alec R. & Maloney, William F., 1998. "The informal sector, firm dynamics, and institutional participation," Policy Research Working Paper Series 1988, The World Bank.
  6. David McKenzie & Christopher Woodruff, 2008. "Experimental Evidence on Returns to Capital and Access to Finance in Mexico," World Bank Economic Review, World Bank Group, vol. 22(3), pages 457-482, November.
  7. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
  8. Joshua D. Angrist & Guido W. Imbens, 1995. "Identification and Estimation of Local Average Treatment Effects," NBER Technical Working Papers 0118, National Bureau of Economic Research, Inc.
  9. Pablo Fajnzylber & William Maloney & Gabriel Montes-Rojas, 2009. "Releasing Constraints to Growth or Pushing on a String? Policies and Performance of Mexican Micro-Firms," Journal of Development Studies, Taylor & Francis Journals, vol. 45(7), pages 1027-1047.
  10. Wilbert van der Klaauw, 2002. "Estimating the Effect of Financial Aid Offers on College Enrollment: A Regression-Discontinuity Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1249-1287, November.
  11. Kaplan, David S. & Piedra, Eduardo & Seira, Enrique, 2007. "Entry regulation and business start-ups : evidence from Mexico," Policy Research Working Paper Series 4322, The World Bank.
  12. Almeida, Rita & Carneiro, Pedro, 2005. "Enforcement of labor regulation, informal labor, and firm performance," Policy Research Working Paper Series 3756, The World Bank.
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Citations

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Cited by:
  1. Aureo de Paula & Jose A. Scheinkman, 2007. "The Informal Sector," PIER Working Paper Archive 07-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Aureo de Paula & Jose A. Scheinkman, 2007. "The Informal Sector, Third Version," PIER Working Paper Archive 08-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 21 May 2008.
  3. Rafael La Porta & Andrei Shleifer, 2008. "The Unofficial Economy and Economic Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 275-363.
  4. McKenzie, David & Sakho, Yaye Seynabou, 2007. "Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability," IZA Discussion Papers 3179, Institute for the Study of Labor (IZA).
  5. Áureo De Paula & José A. Scheinkman, 2011. "The Informal Sector: An Equilibrium Model And Some Empirical Evidence From Brazil," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 57, pages S8-S26, 05.
  6. �ureo de Paula & Jose A. Scheinkman, 2010. "Value-Added Taxes, Chain Effects, and Informality," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 195-221, October.
  7. Gatti, Roberta & Honorati, Maddalena, 2008. "Informality among formal firms : firm-level, cross-country evidence on tax compliance and access to credit," Policy Research Working Paper Series 4476, The World Bank.
  8. Suresh de Mel & David McKenzie & Christopher Woodruff, 2009. "Are Women More Credit Constrained? Experimental Evidence on Gender and Microenterprise Returns," American Economic Journal: Applied Economics, American Economic Association, vol. 1(3), pages 1-32, July.
  9. Aureo de Paula & Jose A. Scheinkman, 2009. "“Value Added Taxes, Chain Effects and Informality”, Second Version," PIER Working Paper Archive 09-041, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 09 Nov 2009.
  10. Neil McCulloch & Günther G. Schulze & Janina Voss, 2010. "What Determines Firms’ Decisions to Formalize?," Discussion Paper Series 13, Department of International Economic Policy, University of Freiburg, revised Nov 2010.
  11. Corseuil, Carlos Henrique L. & Moura, Rodrigo Leandro de, 2010. "The effects of tax incentives for small firms on employment levels," Economics Working Papers (Ensaios Economicos da EPGE) 701, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  12. Medvedev, Denis & Oviedo, Ana Maria, 2013. "Informality and profitability : evidence from a new firm survey in Ecuador," Policy Research Working Paper Series 6431, The World Bank.

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